Carmakers gird for new fuel economy standards

Bush's energy plan not so popular with automakers or environmentalists

SAN FRANCISCO (MarketWatch) -- President Bush just can't win these days.

The proposal to raise fuel economy standards that he delivered during Tuesday's State of the Union -- part of his broader plan to curb gasoline consumption by 20% over the next decade -- is either going too far or not nearly far enough, depending on whom you ask.

The administration, oft-criticized for its glacial pace in confronting the nation's dependence on foreign oil, plans for most of that reduction to come from renewable and alternative fuels, with the higher fuel economy standards pegged to take care of the rest.

Bush envisions a 4% annual increase to corporate average fuel economy (CAFE) standards for cars beginning in model year 2010 and for trucks in 2012.

Such regulatory changes could prove costly for automakers, particularly the Big Three, with each 5% increase in fuel economy standards costing between $200 and $400 per vehicle, according to Deutsche Bank analyst Rod Lache.

The CAFE standard for passenger cars is 27.5 mpg, where it has sat since 1990. For light trucks, a recent rule will push it to 24 mpg from 22.2 mpg within four years. The U.S. Energy Department estimated the most recent increase to cost about $275 per light truck.

Light trucks that exceed 8,500 pounds, like the Hummer and other big pickups and SUVs, have long been exempt from CAFE standards; but that will change in 2011.

General Motors
GM, +1.48%
Ford
F, +0.88%
and DaimlerChrysler
DCX
which rely heavily on gas-quaffing trucks and SUVs for profits, are already struggling to revive slumping sales and reverse the hefty losses.

The burden of retooling their fleets without the credits that rivals Toyota
TM, -0.05%
and Honda
HMC, +0.66%
have earned for their small-car heavy lineups could pose yet another hurdle for domestics struggling to remain competitive.

That, of course, doesn't sit well with the leaders of the biggest U.S. manufacturers.

An unfair disadvantage

General Motor's Vice Chairman Bob Lutz last month in his blog compared "forcing automakers to sell smaller cars to improve fuel economy with fighting the nation's obesity problem by forcing clothing manufacturers to sell garments in only small sizes."

He said it puts the domestic manufacturers at an unfair disadvantage to the imports, mainly the Japanese, who have earned years of accumulated credits. Automakers are allowed to bank credits from years where they surpass CAFE requirements and use them later.

And just yesterday, DaimlerChrysler CEO Dieter Zetsche said that trying "to sell people what they don't want is not a winnable business proposition.

"I've always thought CAFE -- in the country that is the world's model for a free-market economy -- to be a bit of a contradiction," he added. "It's an attempt to regulate supply and not to use market forces to stimulate demand for more fuel-efficient vehicles."

But while the Detroit car companies bristle at the notion of the stricter rules, others see another proposal without teeth.

More is needed

For many, like analyst Jim Sanfilippo of Automotive Marketing Consultants in Bloomfield Hills, Mich., the plan rings hollow after so many years of dithering.

"Given the 32-year window that Nixon, Ford, Carter, Reagan, Bush No. 1, Clinton and [the current president] had to exhibit a hint of leadership in the area of energy policy, almost any current 'call to action' comes off as specious and anemic," he said.

In fact, over the past 20 years, scant progress has been made in moderating our gas intake. Fuel-efficiency for the average vehicle on the road slipped 5% to 21 mpg from its peak in 1987 of 22.1%, according to the Environmental Protection Agency.

At the same time, the average vehicle weighs 1,000 pounds more than it did back then and churns out 219 horsepower, nearly double what it was in 1987.

Kateri Callahan, president of the Alliance to Save Energy, commended Bush's proposal but said asking Congress only for the authority to have the Secretary of Transportation 'develop a plan' is too circuitous and time-consuming.

"The most direct route to increasing fuel economy -- and to protecting our national energy, environmental, and economic security -- is for the administration and Congress to work together to establish, through law, specific CAFE increases for cars and light trucks," Callahan said.

Carl Pope, executive director at the Sierra Club, was even less enthused.

"The president assumes that fuel economy will increase but fails to order an increase when a 40-mile-per-gallon standard is the single biggest step we could take to curb global warming and end oil dependence," he said.

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